Designing Frameworks for Central Bank Liquidity Assistance: Addressing New Challenges

Abstract

During the 2007–09 Global Financial Crisis, central banks in many countries provided unprecedented amounts of liquidity assistance (LA) in order to deal with major episodes of systemic financial distress. They also had to find new arrangements for cooperating in providing LA to internationally active institutions. The lessons learned from that experience remain highly relevant today. Against this background, the Committee on the Global Financial System (CGFS) mandated a Working Group under the Chairmanship of Hiroshi Nakaso (Bank of Japan) to identify areas where central banks continue to face common challenges in dealing with liquidity stress, especially in a cross-border context. They concern three issues in particular: the provision of LA to internationally active financial intermediaries; transparency about LA; and the provision of LA to a market. The following report summarises the Group’s conclusions in a set of principles. The overarching message is the need to prepare in calm times to be able to provide LA effectively in times of stress. In this context, central banks need to consider how their national frameworks for LA might interact when providing LA in a cross-border context. They also need to cooperate with a wide range of other policy making institutions, including regulators, supervisors, and resolution authorities. I hope that the report will facilitate this work and help ensure that central banks are as well prepared as possible for dealing with future crises.

Keywords: lender of last resort, liquidity assistance, central banking, financial stability

JEL Classification: E58, G10, G20, H12